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Covan, Inc. is expected to have the following free cash flow: ...

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Finance

Covan, Inc. is expected to have the following free cash flow:

Year

1

2

3

4

times times times

FCF

1010

1212

1313

1414

 Grow by

3 %3%

per year

a. Covan has

77

million shares outstanding,

$22

million in excess cash, and it has no debt. If its cost of capital is

10 %10%,

what should be its stock price?

b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price?

c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?

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